The European Commission is getting ready to relax budget rules to give member countries more freedom to fuel economic growth with public investment.

More emphasis needs to be put on how to raise Europe's growth potential

Pedro SolbesEconomic and Monetary Affairs Commissioner

The Commission is ready to scale down its resistance to public investment funded by running deficits - in other words building up debts, according to Economic and Monetary Affairs Commissioner Pedro Solbes Mira.

In a speech ahead of a eurozone finance ministers' meeting on Thursday, and a full-blown EU finance ministers' meeting on Friday which will review the rules, Mr Solbes stressed the need for change.

"More emphasis needs to be given to the implication of current budgetary policies on the long-run sustainability of public finances," Mr Solbes said.

Such a change in emphasis could make it more acceptable, in the eyes of the Commission, for healthy economies to run a deficit in the short-run so they can improve growth in the long-run.

Investment in growth

The EU executive's move was sparked by the way "growth prospects were quickly revised downwards and budget deficits started to widen" during the economic downturn of 2001, Mr Solbes said.

It precedes a proposal, due this autumn, which will outline common standards for economic policy which should

preserve macroeconomic stability

raise the economic growth potential

cope with economic shocks

"The focus is increasingly on growth" said Mr Solbes.

The move is also seen as a response to criticism from several European Union member states which have been angered by what they see as the Commission's meddling with their national spending plans.

On Wednesday France ignored Mr Solbes' warning and raised its budget deficit target by 50% to 2.6% of its gross domestic product.

Italy's approach has been less blunt. Here, the government wants to use accounting methods which would show a deficit much smaller than it would be using EU methods.

And earlier this year, Germany and Portugal managed to get away with deficits close to or above the 3% maximum, set down by the rules, by promising to improve by 2004.

No pain, no gain

"Four member states, namely Germany, France, Italy and Portugal, do not yet meet the close to balance, or in surplus, requirement of the Stability and Growth Pact," Mr Solbes said.

In the period before euro membership, for those new members states with outstanding financing needs, a certain amount of deficit financing might be unavoidable

Pedro SolbesEconomic and Monetary Affairs Commissioner

But as long as they get their act together by 2004, their sins will be forgiven, Mr Solbes' speech suggested.

It seems likely that, increasingly, European countries will be allowed to run deficits when the chips are down in order to bounce back more quickly.

"More emphasis needs to be put on how to raise Europe's growth potential while at the same time preserving macroeconomic stability," he said.

So whereas, in the long-run, countries must still operate "sustainable budgetary positions", the Commission's rules should also encourage countries to "refocus the attention of budgetary policies towards medium-term concerns, including the economic growth performance".

The UK's low national debt and low pensions liabilities could mean that the Commission would stretch the rules for the UK.

"We want to apply the stability pact in a way that makes economic sense," said a Commission official quoted by the Financial Times (FT).

The UK is "clearly a special case", the official said.

Such a flexible interpretation would mean the pact would no longer be a major obstacle to the UK joining the euro because, in the eyes of Chancellor Gordon Brown, it would no longer be seen as a set of rules hindering economic growth, the FT reasoned.

More freedom for newcomers

Mr Solbes' flexible approach would also enable the countries that are currently queuing up to join the EU more budgetary freedoms.

"New member states will have to comply with the... convergence criteria when their participation in the euro is decided. No more and no less," Mr Solbes stressed.

"But in the period before euro membership, for those new members states with outstanding financing needs, a certain amount of deficit financing might be unavoidable.

"One could argue that a longer fiscal adjustment process is warranted," he said.

Mr Solbes said the new entrants' "specific investment needs" should be considered and the focus should be on "medium-term macroeconomic stability, rather than [on] achieving any particular target for the budget balance".